Moneyball without the ball

Atna Resources and the Importance of Following my Rules

by Lsigurd on June 2, 2013

Things have turned out poorly for Atna Resources (ATN.to). A combination of (not atypical) mine development delays, a precarious cash position and a falling gold price have coincided with each other to crush the stock. That crushing reached a culmination on Thursday when the share price tumbled 43% to 25 cents.

Its crazy to think that I was adding to Atna as little as 3 months ago.

Fortunately I did see some of this coming. My losses have been mitigated from what they could have been. As I tweeted in mid-March.

I remain sympathetic to gold over the long-run. As I’ve written extensively, I am wary of more credit dislocations and I expect the response to be further quantitative easing.

But I am also wary of current underlying conditions and what they portend to the short term price of gold. It appears to me that the credit system is reflating. The collateralization market is showing life. What clarified my opinion to sell was listening to the conference calls of a number of commercials REITs. As I will discuss below, there has been a marked improvement in the credit markets over the last 6 months .

Our economic growth is tied to the growth in credit. I’m a reader of the Richard Duncan (he has a new book I finished a month ago called the New Depression) and I agree with his argument that since the breakdown of Bretton Woods, the relationship between the money supply and growth has changed. Economic growth is now directly tied to our ability to expand credit.

While the conclusions that Duncan draws are dire (thus the title, The New Depression), and will likely be right in the long-run, applying it to the immediate condition leads to the conclusion that the reflation of the credit system should result in one more party before reality catches up.

In this environment, I’m not sure what happens to gold.

Since that time I have reversed course on the miners, but not on gold itself. I got back into a few select miners and development projects that had fallen to levels I didn’t feel were warranted. I bought Argonaut Gold (AR.to), Esperenza Resources (EPZ.v), Timmins Gold (TMM.to), Alamos Gold (AGI.to) and recently Midas Gold (MAX.to). But I was very careful to pick companies that had low cost operations, low capital expenditure growth projects, and for the most part significant cash reserves, as I remain wary of the metal itself. Atna unfortunately fails the test on two of these requirements (low cost operations and significant cash reserves) while the press release on Thursday calls into question the third.

Unfortunately, while I was aware of Atna’s shortcomings at the time, I chose not to exit my position. In the practice portfolio I sold 3,000 shares, which was 1/3 of my position (I kept a little less than a 3% position in the stock). That is consistent with what I sold in my actual portfolio. Thus I have taken losses over the last couple months of about 2% to my overall portfolio. Not insignificant.

Why I have rules and why I should follow them more closely

I don’t have a lot of rules that I follow. I have a few simple precepts and I try to abide by them the vast majority of the time. These rules are:

Never add to a losing position

At the very latest, lighten up significantly on positions that are showing 20% losses from the original purchase

Keep selling a stock that continues to go down

Atna is an example of where following #2 and #3, which are basically different ways of saying sell that which isn’t working, has been helpful, but not as helpful as they might have been had I followed them rigorously.

Back to the Details

The other lesson to be learned from Atna was said best in a piece put out yesterday by Proactive Investors. They quoted the following from Gecko Research:

“We are once again reminded of the fact that we invest in people when we buy shares in a junior company. It’s not the first time that we have encountered straight out lies and most likely not the last either.”

Actually the entire piece is worth reading. It focuses on Gecko’s dismay upon receipt of the May 29th press release. It pretty much sums up my surprise, except that I have less animosity about the whole event; I have no expectations of junior mining companies, they are speculative and it is a difficult business; I am well disposed to their potential failure from the outset.

There is much in the statement that is worth reflecting on. Each investment that I make is to some degree dependent on the people running the companies, and it must be conceded that people are unpredictable, that even in good circumstances the outcomes that depend on people are not certain. That is why rules like the one’s I mentioned above are necessary. These rules simply say: “I cannot know everything that is happening and I can not predict how it is going to happen and so therefore I will adjust my risk to reflect this particularly in situations where there is evidence (price movement) that suggests my best estimate is incorrect.”

The downside is that these rules can cause you to miss out on gains, as I have on occasion. But in the long run I think that following something that is right in principle is generally going to lead to a superior outcome. I know that the times I don’t follow them are often times I regret.

Where to go from here

The other problem with not following your rules is that you are stuck in no mans land. At 22c, what do you do with what’s left of Atna? Do you sell it for a few pennies just to be rid of it? (this is what I did with Nam Tai, though the circumstances there were somewhat more hopeless than with Atna) Some might suggest you buy more, but that is only breaking the rule again and really, if you are very wrong thus far what makes you think you are suddenly going to be right?

In Atna’s case, there are too many questions for me to add to my position. I don’t understand the numbers management described in the conference call on Thursday. The first description they gave of development ounces and tonnage available from Pinson didn’t add up until Sprott questioned the numbers and got them to revise the ounces downward (from 80,000 oz of available gold in stopes to 40,000 oz). Also, the mining rate that they said they expect (3,000 tonnes per month) would produce about 1,000 oz of gold per month, and that doesn’t align with time estimate they provided to exhaust the available development ore (6-12 months) given that they have 40,000 oz of ore available.

There is also the fact that if the mine has had difficulty making a go of it at $1,400 gold, and if, as was suggested on the call, the contractor costs used to build the 43-101 economic estimate were perhaps too low, then what is the mine profitable at? To those that would argue that the mine could have been profitable at $1,400 gold if they had been able to finish development, to that I have to ask why the mine development would be curtailed if Atna saw profitability coming after a few more months of development . Wouldn’t they simply hedge the price of gold for a few months, get a bank line and get the mine up to commercial production?

It’s not so much that I think the opportunity isn’t there, its just that the information I have isn’t painting a conclusive picture that I can make a decision based on. Not clear enough to add more.

Therefore, I think I am just going to sit on it. At 22c the stock has a market capitalization of about $30 million. There are a number of juniors with no production and far fewer ounces that are trading at a higher valuation than that. If anything at all goes right at the company it is worth more than $30 million. If nothing goes right the position that remains (which is now < 1% due to price depreciation) has been decimated down to where any further losses will have limited impact on my portfolio. I will remove the ticker from my watchlist (no sense in exacerbating the pain) and check back from time to time. Lesson learned.

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Nice writeup. Atna has a repeated pattern of disappointing investors, all the way back prior to the Atna/Canyon merger. The same lame management has been there the whole way disappointing investors and prolonging the pain.

To read the earliest 43-101 resources for Briggs and Pinson, and then to review the economics as presented by management at that time and compare to reality is good for a laugh. Simply put, management has zero credibility- that has been demonstrated again and again. One has to wonder if the majority shareholders (Sprott at this point?) simply keep them on life support for a potential future cash buyout to take private or to keep the investment banking fees rolling in (as secured by gold via cash flow or in the ground).

For all the above, at these prices, this may represent a prudent speculation.